Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Published On
July 21, 2020

Should you tax gain harvest or do a Roth IRA conversion? Should active or passive investments go in retirement accounts? If you’re on the younger side, why own bonds? Are Vanguard Roth accounts any better or worse than others? What’s the break-even on taking Social Security early vs. late? Should you convert your 401(k) or retirement account to Roth all at once?

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Show Notes

  • (00:48) Should I Convert My IRA to Roth All at Once?
  • (04:45) Can We Convert Directly From 403(b) to Roth Without Penalty?
  • (10:33) Is Vanguard’s Roth IRA Better or Worse Than Everyone Else’s?
  • (14:34) Should I Tax Gain Harvest or do a Roth IRA Conversion?
  • (21:06) Can You Use a Coronavirus Related Distribution for 3 Years then Put It in a Roth IRA?
  • (27:02) Should IRAs Go Into a Trust? Do Beneficiaries Have to Put Inherited IRAs Into a Roth?
  • (33:48) What’s the Break-Even on Taking Social Security Early vs. Late?
  • (38:02) Where Can I Find the Best Mortgage Refinancing Rates?
  • (39:13) Why Would I Own Bonds at Age 35?
  • (43:25) Active vs. Passive Investments in Retirement vs. Non-Retirement Accounts

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Today on Your Money, Your Wealth®, we’ve got all sorts of money questions on deck. Should you tax GAIN harvest? Should active or passive investments go in your retirement accounts? If you’re on the younger side, why would you own any bonds? Are Vanguard Roth accounts somehow better or worse than anyone else’s? What’s the break-even on taking Social Security early vs. late? See, we do talk about things other than Roth conversions! That’s not to say that we won’t discuss Roth conversions, because we do have a bunch of questions about them too – as a matter of fact, we’ll start with ‘em. Send your money questions in, Roth-related or not: click Ask Joe and Big Al On Air in the podcast show notes at YourMoneyYourWealth.com. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth® – and don’t call ‘em the Roth Brothers – Joe Anderson, CFP®, and Big Al Clopine, CPA.

Should I Convert My IRA to Roth All at Once?

Joe: Evan from Los Angeles. he writes – no, he’s got a little voice recording. Let’s hear what he’s got to say, Al:

Evan: “Hi, I watch your show on YouTube and my name is Evan, and I wanted to ask a question about converting. I have $251,000 in a Roth and I have $150,000 in an IRA that – I’m now 56. So I was wondering if I should convert that all at once or should I just… I make under $40,000 a year so I’m in the 12% tax bracket. So I was wondering if I should do it little by little or just bite the bullet and do it all at once. Thank you so much. Bye now.”

Joe: Good question. So we get this quite a bit where he could be confused. Because he’s already done a good job Al, of about $250,000 some odd in a Roth; $150,000 in an IRA. He’s 56, just wants to convert at all.

Al: Get it all out.

Joe: He’s in the 12% tax bracket. So sometimes people think if I’m in the 12% tax bracket I’m going to convert $150,000 and pay 12%. It doesn’t necessarily work. I wish it would. But if he’s making $40,000, he doesn’t have that much room in the 12% tax bracket.

Al: Well it depends. Is he single?

Joe: He’s $40,000 a year. I don’t know, is he single?

Al: Single? Married? We’re not sure. So that changes it a bit. But let’s just say makes under $40,000 a year, if he’s single there’s a standard deduction of about $13,000. So under $40,000 we’ll call it $39,000. So $39,000 minus $13,000 so that’s about $26,000. We’ll call it $25,000. So he’s got about $15,000 of room in the 12% bracket to convert, which that’s probably the right answer. Because if he’s only got $150,000 in an IRA and assuming he doesn’t have a pension he’s gonna be in a low bracket for life anyway.

Joe: I would not convert it all Evan, because you convert $150,000, it pops him up in the 24%.

Al: On the other hand, let’s just say he’s married and if his spouse doesn’t make any income then they’ve got- it’s about $25,000 deductions. So he’s got probably about $65,000, $70,000. He could convert to stay in that 12% bracket.

Joe: Let’s say- I don’t know- let’s say his money doubles 3, 4, times- His RMDs not going to be that big.

Al: That’s the thing too.

Joe: If he’s not adding anything to this thing because most of the money is in a Roth anyway so let’s say that doubles. So now he’s got $300,000 by the time he has to take a required distribution. What’s that going to be, $12,000. That’s going to be taxed at a pretty low rate.

Al: That is true. Yeah. Although it may be 15%.

Joe: If you’re in the 12%, I would take advantage. But I don’t know if I would go higher than the 12%.

Al: I definitely would not, based upon what we know. Now if he had a- I don’t know- a portfolio outside of retirement of $5,000,000 that’s going to generate a lot of income we might have it a little different answer but we’re assuming there’s not a lot of other assets.

Joe: Or if he’s got a pension coming at age 65.

Al: Exactly.

Joe: What’s your Social Security income going to look like. So those are some factors that you can take a look at.

Al: In some ways, although we don’t normally recommend you convert everything, but in some ways, if you’ve got some other income like a small pension you might want to convert it if you can do it in a low bracket because then less of your Social Security is going to be taxable.

Joe: So it’s always looking at what’s your tax bracket today? What’s your tax bracket going to be in retirement? And where do you feel tax rates are going to go? I feel 12%- if you’re in those lower brackets it’s going to make sense to convert because that’s a pretty cheap tax and if you take a look at everything else that’s going on, I don’t think tax rates are going to stay this low. But I won’t go any higher than that without more diligence.

Al: Agreed.

Joe: Well thanks for the phone call, Evan.

Can We Convert Directly From 403(b) to Roth Without Penalty?

Joe: Got Jim. Writes in from Minnesota. “I’m from Minnesota and drive a grey Volvo.” Yeah.

Al: S60.

Joe: That’s a nice Volvo. It’s grey too. Probably looks sharp in that car.

Al: I bet ya he dresses well, driving in that Volvo.

Joe: Volvo’s very safe. He’s listening to financial podcasts, driving the car.

Al: He’s got a nice sport coat on, probably.

Joe: Probably. “This has become my favorite podcast because you are a very strong team.” Thanks Jim. “Joe adds the financial planner expertise.” That’s kind of a stretch. “Lots of energy and some sheer fun. Al not only makes tax topics tolerable but is superb at breaking complex problems down to the understandable, practical next steps.” Very good. “Andi is a marvelous organizer; adds more fun energy.” So you have fun energy too, Andi.

Andi: Mmmm.

Al: I’m just that resource book.

Joe: Yes. You’re the straight man. “It has taken the show to the next level”- or “a new level. I listened to some 2016 podcasts and while the content was very good, Andi adds a lot.” Look at Jim, just kissin’ Andi’s ass. “You got to keep her happy.”

Al: Andi, did you add that sentence yourself?

Joe: She had to have. “He didn’t listen prior to my birth of Your Money, Your Wealth® because it sucked.” “I like to confirm or deny my belief that we can take 403(b) dollars without penalty prior to age 59 and a half and employment is terminated.”

Andi: “If employment is terminated.”

Joe: Yes. “I’m 58. My wife is 57. The money we’d ultimately like to move into my wife’s Roth IRA would be coming from her 403(b) as she’s a teacher who plans to teach until 2021 and will be 58 when she terminates employment with the school district. We’d like to convert $50,000 to $60,000 of our 403(b) annually over the next 4 years while we still have historic low tax brackets. We’re in the 22% tax bracket with plenty of room to convert. She won’t be 59 and a half until 2023 when I know we can get it out 10% penalty-free. We’ve been good savers so likely end up with extra money after retirement to pass to the heirs and we’d like to get the money to the Roth since we live in Minnesota and they still have a state tax. So we are working to better balance out how much money is in my wife’s and my name. The Roth is the last dollars we’d spent if needed in retirement so is most likely to grow and potentially create an estate issue depending on longevity. In addition 2) Can I move it penalty-free?” You could tell he’s from Minnesota. He writes like-

Al: He talks like you.

Joe: Don’t ya know. “I’d also like to know if I can roll it directly to her Roth IRA? Or if I need to make a first stop at a traditional IRA? Is there any other strategies or complications I’m missing? Thanks for the great show.” Okay, so Jim thank you very much for the nice compliments. And Minnesota brother, a few things. When you take money out of a 403(b) into a Roth IRA, it’s not a distribution. It doesn’t matter how old you are. There is not a 10% penalty. The only issue with 403(b) dollars is that if you’re currently employed as an active participant in the 403(b). If you’re under 59 and a half you would have to do an in-service withdrawal. She’s a teacher so maybe she has multiple 403(b)s then you could potentially do it. They changed the law with 403(b) plans because of the teacher issue that you would get these people that would go into the lunchroom and then they would say hey this is your retirement plan and then they would sell them a bunch of annuities. So you would run into teachers that had like 15 different TSAs or 403(b)s with $300 or $3000 or $10,000 or whatever. So they tried to make it more difficult for you to take money out of a 403(b) prior to separation from service. If you do move it into a Roth IRA you’re more than eligible to do that without a 10% penalty because the IRS does not see that as a distribution. They look at it as a rollover. You cannot put your money into your wife’s Roth. I think there was some kind of question in regards to that. So if you have a 403(b) dollars or 401(k) dollars Jim, you have to put your dollars into your Roth IRA. She has to put her money into her Roth IRA. I understand you’re trying to balance out your overall balance sheet in regards to how much assets you have versus she, but you cannot fund someone else’s Roth IRA with your retirement dollars. You could fund a standard Roth IRA as a contribution but you would not be able to convert your monies into hers or convert her monies into yours. So I think that answers it.

Al: I think so. And just one other quick thing, if for some reason you do need the money and you’re separated from service after age 55 then you can take the money out penalty-free. That’s not widely known- 401(k)s and 403(b)s- as long as you separate from service when you’re 55 or older; you can take the money out, pay tax on it even under age 59 and a half as long as you’re age 55.

Is Vanguard’s Roth IRA Better or Worse Than Everyone Else’s?

Joe: Got Helen, she writes in from San Diego. “Hi, Joe, Big Al, and Andi. This is Helen from San Diego. I’m under 59, too old to be Joe’s girlfriend.

Al: Oh so you must have mentioned- oh, you mentioned in podcast 273-

Al/Joe: -wanted a 23-year-old.

Joe:- to be my girlfriend.

Al: I don’t remember that.

Andi: I think you actually said that your girlfriend is 23.

Joe: Well I don’t doubt it. “Joe always looks handsome.” Oh, thank you, Helen. “Al, you look great for old you are.”

Andi: That’s not what she said.

Joe: “Al looked great now than in Sunday TV broadcast- maybe old broadcast. Andi, I like your voice; very warm. And your short haircut looks sexy. After pandemic, think of cutting short hair again.” Oh, so Helen… “Andi’s not in the Sunday show, you should show up one day.”

Andi: I’m just gonna barge in and start talking.

Joe: I think that’s a good plan. “Thank you for the show talking about retirement.”

Al: She loves listening to our broadcast.

Joe: Yes. She’s a big fan of YMYW. “I’m having Vanguard from work.” So she’s having Vanguard. Is that for lunch?

Al: Well let’s see what that might mean. Read on.

Joe: “I contribute money to a Roth IRA. I called Vanguard. They told me their Roth IRA is limited to $6000 per year.”

Al: It is not limited.

Joe: Is not limited. Thank you, Al. “I’m 55 years old. Can contribute as much as you want up to 75% of your pay. My question, what’s the difference of a Vanguard Roth IRA and a regular Roth IRA limited to $6000 per year contribution? Thank you. Hope you all stay safe and be well.” I have no idea who you talked to, Helen.

Al: But here’s what I think. I think she’s talking about a Roth 401(k) versus a Roth IRA. Because she talks about 75% of her pay. So I think the Vanguard is probably a 401(k) plan, I’m guessing, at her employer. And that is true. A Roth 401(k), you can put- when you’re over 50, you can put it in $26,000 dollars. It’s not unlimited, but you can put in $26,000; whereas, a regular IRA when you-

Joe: You could even put more than that.

Al: Well if it’s after-tax.

Joe: Or no you can do the profit sharing. It’s still all under the umbrella of a 401(k).

Al: I’m assuming because she’s talking about from work that she’s not the employer.

Joe: Well yeah.

Al: So I’m thinking that’s what she’s talking about. And this sort of bring- if I’m right, this sort of brings up a good point anyway and that is people get confused about Roth IRA versus a Roth 401(k). They’re two different things and you’re actually allowed to do both. You don’t just have to do- depending upon if you have an employer that has a Roth 401(k). And so if you do typically it’s $19,500 you can put in. If you are over 50, it’s $26,000 and the employer, you’re right, may put in a match as well. So you may get even extra. Whereas a Roth contribution it’s- I think it’s $6000 this year, $7000 if you’re over 50. I think that’s- I think those are the numbers. Anyway if you have a Roth 401(k) you can also do a Roth IRA in addition to that. So a lot of people don’t realize you can do both as long as your income is low enough that you qualify for that. So I think that’s maybe that’s what she’s getting at.

Joe: The Roth at work, I would imagine is the 401(k).

Al: I think so.

Joe: It’s just different contribution limits then just being the Roth IRA. So hopefully that clears things up, Hellen. Appreciate your writing in and we’ll definitely get Andi on the TV show.

Should I Tax Gain Harvest or Do a Roth IRA Conversion?

Joe: Johnny from New Jersey writes in ” Hello everyone. Because of a severance package this year, I have the opportunity next year either do a tax gain harvest or a 401(k) to Roth IRA conversion. This opportunity is provided because I won’t be tapping into my 401(k) for income. Can you help determine which would be better? Can you recommend an amount for either?” Well Johnny, first of all, we don’t make recommendations. We have conversations. We don’t give advice. We chat about stuff.

Al: Right.

Joe: It’s compliance, CYA. “I was thinking only up to the 12% income tax bracket. This would mean my zero cap gains tax if I do the tax gain harvest. My pre-tax 401(k) is approximately $1,000,000; my Roth is $600,000; cash equivalents about $1,000,000; I’m 58; withdrawal will be 3% or 4% a year. Thanks. I forgot to mention I have approximately $300,000 in stock funds.” But what he forgot to mention is that what is the basis of that? And what’s the gain?

Al: And how is it invested? And does he need to rebalance?

Joe: So let’s just talk broad strokes here. Tax gain harvesting. So if you’re in the 10% or 12% tax bracket, you can sell stocks or bonds or mutual funds or real estate or whatever and have a 0% tax up to that 12% tax bracket. So he wants to gain harvest. So he’s got some gains in his account so he can sell up to that 12% tax bracket and not pay a dime in tax.

Al: So quick examples. The top of the 12% bracket is $40,000, roughly if you’re single. A little bit less, but let’s call it $40,000. And by the time you look at your income and subtract out your standard deduction or itemized deductions, let’s just say that’s $10,000, just to make up a number. So now you look at, $40,000 is the top of the bracket, $10,000 is where I’m at. I can sell $30,000 worth of gain and pay zero federal tax. You will potentially have to pay state tax. So keep that in mind. But anyway, there’s no federal tax in that situation. If you go over, let’s say you by mistake, you sell $40,000 and you should have only sold $30,000 the first $30,000 of gain is tax-free. The next $10,000 extra, that’ll be taxed at 15%. So that’s how that works. So you can’t sell all of your gains and pay no tax. It’s only to get to the top of that 12% bracket.

Joe: So that’s tax gain harvesting. And then he’s thinking I can do that and get some tax free income or reinvest or whatever because tax gain harvesting actually means you’re selling that stock and kind of buying it back and then you’re just increasing your basis. With tax gain harvesting you can buy the stock back the same day. Tax lost harvesting there’s a wash sale rule.

Al: And the advantage there of course is that if you need the funds later you could actually sell the stock and your tax basis would be a lot higher. You’d have a small gain and you probably wouldn’t pay hardly any tax.

Joe: If you’re really bullish on the stock. You got Amazon. You already had a big run and you think it’s going to continue to scream so you sell it. You don’t pay any tax up to that tax bracket. You buy it right back and then so now you have a higher tax basis. So if you do sell it in the future that’s going to help some of the taxes potentially. So that’s one strategy. The second is a Roth conversion. So Roth conversion- he’s 58. He’s got $1,000,000 sitting in retirement accounts- 401(k) pre-tax. So he’s thinking 12% tax bracket. He’s got another $600,000 in Roth accounts and $300,000 in stock funds and $1,000,000 sitting in cash. I would look at higher than the 12% tax bracket, Johnny if he’s single. Because he’s got plenty of capital and cash to live off of and he’s not necessarily- let’s say he’s 58- he’s got, what- 14 years, until the required distribution. So that could double twice on him. It’s $3,000,000 sitting in a retirement account. That’s $120,000 required distribution if he’s single. He’s going to be a lot higher than the 12% tax bracket. So maybe you might want to look at a higher bracket in regards to conversion if that’s the route you wanted to go.

Al: But you don’t want to do both. Because if you did both and all of a sudden you’re 0%- 0% capital gains are taxed at 15% and you’re paying the tax on the Roth conversion, that actually comes out to be a pretty high tax rate.

Joe: Yeah because you’re using up that 0% cap gains rate with the conversion dollar.

Al: Just be careful of that. I think I might say it depends on how the $300,000 stock funds are invested. If you feel like you’re taking too much risk or you want to rebalance or maybe it’s not the right allocation for you I might favor that first and get that done. And then at 58, you’ve got a lot of years to go ahead and get a lot of the rest of it converted.

Joe: But he’s got $1,000,000 in cash. And if they’re stock funds. I don’t know. So it could go either way.

Al: Yeah you could. If he did no Roth conversions by the time he had to take RMDs, his 401(k) is going to be over $2,000,000-

Joe: Probably $3,000,000.

Al: Could be.

Joe: $120,000 distribution- he’s gonna be higher than 12%.

Al: If he’s single. Which we don’t know.

Joe: All right Johnny. Hopefully that helps. Thanks a lot for the question.

At long last, you can check out brand-new episodes of the Your Money, Your Wealth TV show, and you still have a few more days to download our Special Offer – both are in the podcast show notes and at YourMoneyYourWealth.com. That Special Offer, by the way, is the new eBook, Retirement Revamp: Financial Planning in Times of Crisis, written by our own, Pure Financial Advisors’ EVP and Director of Research, Brian Perry, CFP®, CFA. Brian’s book explains how recent IRS changes can cut your tax bill, how the stock market selloff can set you up for a tax-free future, and how to position your portfolio for an eventual recovery. Retirement Revamp will only be available for a limited time, so click the link in the description of today’s episode in your podcast app and download it for free. And if you have money questions, click the Ask Joe and Big Al banner, also in the podcast show notes, and send us an email… 

Can You Use a Coronavirus Related Distribution for 3 Years then Put It in a Roth IRA?

Joe: Like Ram did in Los Angeles. You think it’s because he likes the Los Angeles Rams? Or do you think his name is Ram?

Al: It’s a good question. He spells with only one ‘m’ though.

Andi: Yeah.

Al: Isn’t that- well maybe that’s right. I was thinking-

Joe: John Rahm.

Al: Yeah I think that’s what I was thinking. Yeah. Yeah.

Joe: But there’s no two ‘m’s there either. But Al spells ram R-A-M-M.

Al: I like to have two ‘m’s. I like my ‘m’s.

Andi/Joe: Ramm.

Al: Never mind that comment.

Joe: So Ram, I could say something but I’m just hold onto that.  I’m just going to put that right back in my pocket. “Can I take an early withdrawal without penalty under CARES Act of $100,000 from an IRA and a) use it for 3 years and then deposit into any IRA, including Roth IRA with no tax? Or is it true that I can transfer $100,000 directly from IRA a Roth IRA in the same year and it’ll be treated as a rollover? Note the CARES Act just says it should be deposited within 3 years in any eligible IRA. Is every Roth an eligible IRA?” So good question Ram. What he is asking is he wants to take a CRD, coronavirus related distribution. So again, you can take $100,000 from your retirement account and he’s saying can I use that money for 3 years? Spend it? Do whatever I need to do? And then deposit it back into my retirement account in 3 years with no penalties, taxes or fees? The answer is yes. But then he goes “including Roth IRA.” So you take the money out, you do whatever you want with it. And then after 3 years you put it into a qualifying eligible retirement account. It does not say a Roth IRA is ineligible, but we don’t feel that the conversion is in the spirit of the law. So just be careful that if you do put it into a Roth IRA you will be taxed of course because it’s a conversion. So you take the money out of a retirement account, let’s say a 401(k) and you spend it you put it back into an IRA. There is no taxes. But if you do put it into a Roth. There will be taxes and they could say you should have owed taxes 3 years ago because if you wait 3 years to pay it back and you pay it back into the Roth IRA, you missed paying the tax over 3 years. And then you’re going to be taxed on the full $100,000 anyway but you’re just going to pay the tax in 3 years.

Al: And you have to pay the tax either all in the first year or over 3 years. So you have all kinds of interest and penalties and I think that the main comment here is that you- it’s a true statement if you qualify for a corona related distribution, $100,000 from an IRA you can take it out now. You can spend it as long as you put money back into your IRA in 3 years there’s no tax consequence. If you put money into the Roth 3 years from now which I’m not sure you can. But let’s just say even you can then it would certainly be taxable. I don’t even think you could do that because it’s no longer a conversion because you had the money. It’s like a giant Roth contribution at that point.

Joe:  You’re putting the money back into an eligible IRA over a 3 year time period. If he did- let’s say if you walk it through- you take $100,000 and what’s going to happen is that you pay the tax over a 3 year time period. But let’s say that you don’t want to pay the tax. You want to pay it back. Well each year there’s still going to show 1/3 of the income on your tax return. And then next year 1/3 of the income. So you’re paying that tax and then the 3rd year when you put it back into an IRA, you’re going to get refunded those tax dollars.

Al: You have to file an amended return to do that. That’s if you put it back in a regular IRA.

Joe: And then so let’s say if he does and he just says all right well I’ve already paid the tax over the 3 years, I put it into a Roth, I don’t know, it’s an eligible IRA. He could. He already paid the tax on it. I don’t see why he would- it would be stupid to do that.

Al: Well it’s just we don’t have a lot of guidance on this. It’s contrary to the spirit of a law to do that. What I’m suggesting is even if you can do it, I’m not sure that maybe in that first year they could potentially allow you. But if you hold it for 3 years and then put it back into Roth, that doesn’t seem like a conversion anymore, it seems like a contribution. But I could be wrong about that.

Joe: But it doesn’t make any sense to do it anyway even if it’s eligible. Why wouldn’t you just get the money into the Roth IRA right away? And have the compounded growth and pay the tax over 3 years?

Al: Right, if that was your idea. If that’s what you wanted to do. Correct.

Joe: But I think what Ram is thinking is that he can avoid the taxation if he pays it back into an eligible IRA including a Roth IRA.

Al: And that’s not true.

Joe: That is not true. So anytime you put money into a Roth IRA, you will pay the tax. One of the workarounds that people are talking about is taking a coronavirus related distribution out of their retirement accounts and then putting that into a Roth and then paying the tax on the conversion over a 3 year time period. So instead of saying take the money out over $100,000 and then 3 years convert it, that’s backward.

Al: You know you wouldn’t want to do that.

Joe: He would need another “m” on his name for that to make sense.

Al: He’d need 3 “m”s. Movin’ on Joe.

Should IRAs Go Into a Trust? Do Beneficiaries Have to Put Inherited IRAs Into a Roth?

Joe: Chris from Vista, California. “Hello Joe, Big Al, and Andi. Estate planning question background.” So a little estate plan. “Estate planning attorney recommends not putting IRAs into a trust and just assign beneficiaries you want the IRA to go to at the death of the trustors. If I assign my adult children currently in the 30s as beneficiaries in equal shares of my Roth IRAs, I think under the SECURE Act you have to take the money out in 10 years. Now I would hope they would wait until the 10th year to take out the total sum to accumulate tax free compound earnings. Question, if they are under 59 and a half when the total sum is taken out, do they have to put it into another Roth IRA? Or can they spend thrift it away as tax free money? Also why is it not recommended to put a Roth IRA into a trust? An avid podcast listener. Thank you.” Okay cool. So couple things here.

Al: This is a question that you like to answer. So I’ll let you do it.

Joe: Well OK. What the SECURE Act of screwed everything up. Because the stretch IRA is no longer and so what a stretch IRA allowed a non-spouse beneficiary to do would to stretch the tax out over their life expectancy. So let’s say a 30 year old inherited a large retirement account they could stretch the tax out over 40 some odd years. So very small distributions- the money would stay into a retirement account. It would still compound tax deferred and then when you pull the money out you’re being taxed at ordinary income rates. But you could really parlay some wealth that way.

Al: Well you can because then you’re just taking out a little bit each year instead of a whole bunch within say a 10 year period which is what the law is right now.

Joe: Correct. And then so what some people did is that they established a IRA trust. Because a beneficiary- I think the Supreme Court ruled on this a few years ago saying that a beneficiary IRA does not constitute as a retirement account in regards to lawsuits, liabilities and for liability protection. So then people would create these trusts, these retirement trusts and that would protect it because it was in the name of the trust. But the trust had to be established somewhat special. It had to be a look-through, see-through trust; all beneficiaries had to be identifiable, like humans. So you couldn’t have any other- like a charity or something like that in regards or it would fail. You know they had to be legal written. There was a delivery requirement of the trust. So there were some rules and regulations to name the trust as the beneficiary. But now with the SECURE Act, because there’s no more stretch IRA, then you’ve got to be careful what type of trust that you establish. Is it discretionary? So there’s a lot of nuances now with IRA trusts, just because the stretch IRA is no longer and then that the distribution is forced out over 10 years. I believe it’s going to be a force-out earlier because before it was 5 years, then the stretch came, to stretch it out over the lifetime. Now it’s 10 years. With the stimulus and everything else that’s going on, this is an easy money grab for the IRS.

Al: You’re right.

Joe: Because no one really knows. You’re dead Al and then Robby and Ryan, do they really know what a stretch IRA is? Well, they listen to Your Money, Your Wealth®, they would. But it’s like mom and dad died and now I get the retirement accounts. I got to pay a little bit of tax and so on and because most kids didn’t stretch the IRA out regardless. They spent it.

Al:  And most IRAs inherited are pretty small anyway. It’s no big deal.

Joe: So Chris is saying what happens here? If they’re under 59 and a half, no, it’s a distribution. They can’t put that money back into a retirement account. So if it’s a Roth IRA, yes I agree with you. They can continue to let the money grow tax free over that 10 year time period. And then it would be fully distributed out in year10 or they could take a 1/10 out over the 10 years. So whatever that they decide to do or they could blow it all. That’s another reason why you wouldn’t name a trust as the beneficiary to say no, I don’t want you to blow this thing up. And if it’s a Roth IRA, you’re not going to have nearly the problems that you would have if it was a standard ordinary income pre-taxed IRA. Because the income that comes out of a Roth over a 10 year time period is tax free. So you could put all the stimulus- the rules and regulations within these trusts as you want because it’s going to be tax free coming out. The problem with the standard IRA is that it’s ordinary income and tax rates go to 39.6% or 37% after about $10,000 of income. And so if you’re trying to distribute the money out of the IRA over a 10 year time period and if you have sizable amounts and you keep it in trust, the trust will blow it up because you’re going to be taxed at trust rates. So then it’s like I don’t want to get taxed at trust rates so there’s no sense of me keeping it in the trust because I’m trying to save my kids from blowing it or spending- he wants to protect the assets and not have the kids blow it.

Al: And then that really is why you’d use a trust. And so now with the stretch rule being gone so the money has to come out within 10 years, it could come out into the trust.

Joe: But then it’s taxed at trust rates.

Al: That’s right. That’s the problem.

Joe: Or if you distribute it out of the trust doesn’t get blown up in taxes. So either way you’re screwed.

Al: You’re right. But I think if you’re concerned about your kids, I think that’s what you do. You just distribute whatever the income is and keep it in trust. So they can’t really get at it.

Joe: But the Roth is different. You can keep it in trust because even when it’s distributed in 10 years, it’s still going to be tax free and then you just invest it how you-

Al: You don’t have to distribute it at that point because there’s no taxation.

Joe: Because everything comes out of the Roth. And then now it’s out of the Roth and then now it’s gonna be in a brokerage account.

Al: It’s just what it’s invested in at that point creating income from that point on.

Joe: “Also why is it not recommended to put a Roth IRA into a trust?” Well I think we just answered that.

Al: I think so.

Joe: Ok, cool. Just be careful Chris in regards to just making sure that you set up the appropriate trust with retirement accounts, the rule change with the SECURE Act and work with a qualified estate planning attorney that really understands. We worked with several and sometimes we were like well maybe you don’t- we’ll find someone else to do the IRA trust. Because they might be pretty good at just the standard of living revocable living trusts.

What’s the Break-Even on Taking Social Security Early vs. Late?

Joe: So we got Dan Diego from Facebook.

Andi: He replied to a post that we had about the benefits of waiting to claim Social Security on the YMYW TV show.

Joe: Tell me more.

Andi: He says “So there’s an alternative train of thought that says ‘take what you can get now because it might not be there later’ and there may be some truth to that. Would be curious to know the average break even age for those who take their Social Security benefits immediately and those who wait for maximum benefits. I’d heard that it was about 87 or 88. Is that true?”

Joe: No. It’s not true. So what’s he saying with the break-even is that let’s say you get $1000 a month at 62. So that’s $12,000 a year that you would receive. Instead of waiting until 70 where you got hypothetically $2000.

Al: Or more than that even.

Joe: So it’s like well if I got $12,000 for 6 years, that’s pretty good. When does the Social Security Administration pay- if you add up all the dollars the Social Security Administration is going to pay you, and if they pay at 62 versus 70, what’s the break-even? And if it’s 87, 88, well I should take it early? Because I’m not going to live until 87, 88. It’s the break even’s actually a lot earlier than that.

Al: I would- it depends on the assumptions that you make. But I’ve seen 79 to 82, is what I’ve seen.

Joe: Depends on how you look at it. Because you and I look at it as longevity insurance versus an investment.

Al: Exactly. I don’t really think of it that- in a break even sense. But that’s what a lot of people talk about it that way. So the way we think about it is you may live a long life and this is insurance of you living a long life, Social Security backed by the government. And by the way the government, you can say what you want about the government but they control the money supply. So they’re going to pay this money. So now of course if you’re single and you’ve got health issues, take it early. Or if you need the cash, you don’t have any other resources, take it early. But otherwise, we think in general it makes sense to wait. But there is a train of thought that says they may change Social Security, so why not take it now? Maybe they’ll make it means tested at some point to where if I got a lot of money I won’t get all the benefits that I was promised and yeah there is a possibility of that and if that’s your kind of thinking then maybe you do want to consider it. I don’t happen to think they’re going to do that, but I can’t say that for sure.

Joe: But he’s already talked himself into taking it early. So just take it early Dan. Who gives a – ? Well, the break even’s 88. It’s is not going to be there. So take it at 62. That’s my advice to you Dan Diego from Facebook.

He’s being sarcastic, like Joe said earlier these are just conversations, not recommendations or actual advice. We don’t know anything about Dan’s situation. Speaking of which – what’s your situation? Have you done the math to figure out when it makes sense for you to take Social Security? Do you know whether you should do a Roth conversion or harvest your gains? With the SECURE Act, is your estate plan all buttoned up to make sure as many of your assets as possible go where you want them to go? Here on YMYW Joe and Big Al can hash out strategies and give you all sorts of ideas, but what’s right for you is very specific to your situation. What are your goals for retirement? What’s the best way to get there from here with what you have? Sign up for a financial assessment with Joe and Big Al’s team at Pure Financial Advisors and find out. It’s way more comprehensive than Joe mangling your question on the podcast and the fellas spitballing ideas for you in a few minutes and then derailing the conversation with storytelling. Like the podcast, the financial assessment is free, but I’m pretty sure you’ll get a whole lot more value from it. Click the big green “Get An Assessment” button at YourMoneyYourWealth.com or call 888-994-6257.

Where Can I Find the Best Mortgage Refinancing Rates?

Joe: Judy. “Good afternoon. Avid listener on Sunday mornings. Thank you for a great show. Any suggestions on doing a refi? Maybe top 3 companies to shop rates?”  Got anything there Big Al?

Al: So refinance your home; so you’ve got a loan on your home and you want to get a better interest rate or maybe you want to take cash out. So you would like to refinance the loan; pay off the existing one. And like I say you get a lower rate or take some cash out. I’ve had best luck Joe, working with a mortgage broker. I don’t just go to a specific bank. You go to mortgage broker because they might have access to 50 different banks or 75 different banks or whatever it may be. And you don’t really pay any more than you would otherwise. So the fee that is paid- is sort of built into whatever bank that you get placed at. So that’s what I would do. Get a good mortgage broker that has many choices and instead of you trying to call bank 1, bank 2, bank 3, what’s your rate? I wouldn’t do that.

Joe: And rates are pretty low right now.

Al: Very low.

Joe: It might make sense.

Why Would I Own Bonds at Age 35?

Joe: Okay we got Brent, Minneapolis. Lot of people from Minnesota.

Al: I’ll tell you right?

Andi: They’re gravitating towards you.

Joe: Gotta love ’em. They’re my peeps. “Enjoy the show. Let’s get to the point though. You’ve got to probably call it the Roth Conversion Show.” OK Brent. We just talked about refinancing, RMDs, Social Security-

Al: Social Security, CARES Act, Trusts and IRAs-

Joe: Come on. But you’re right. We do talk too much about Roths.

Al: Yeah it’s kind of sickening actually.

Joe: “Anyway I’m 35. Not trying to brag as it’s all relative.” Oh, any time anyone starts an email with that-

Al: There’s going to be some big number-

Joe: “-not trying to brag but I have a net worth about $4,000,000.” Look at the big wallet on Brent. “2/3 in stocks, 1/3 in direct real estate. I never received any inheritance nor have I ever grossed over $400,000 in a year.” I’ve been very scrappy. I live in very prudent and aggressive with investments. I have a few questions I’m hoping you can shine a light on.” Well maybe you should shine a light on us. You got like Big Al money.

Al: Big Al money.

Joe: “Number 1) Why would I ever invest in bonds at my age? Their long term growth are basically zero when you factor in inflation. Seems to me like they’re only useful so people don’t panic when the market goes down. That hasn’t been a concern for me though as I know in the long run stocks will achieve a far higher rate of return. I’ve read basically every personal finance book and few people outside of Charles Ellis make the argument of foregoing bonds altogether so it’s possible I’m missing something. So is it-” Well I don’t know he’s 35 years old. I don’t think he needs any money from the overall accounts. He’s got a net worth of $4,000,000; he’s got some real estate.

Al: He probably has income from that.

Joe: He’s never grossed over $400,000 a year.

Al: Got it.

Joe: Why would he own bonds at his age? I agree. I wouldn’t own bonds at your age either. I’m pretty close to his age.

Al: I think that if you don’t need any cash flow from your investments and you’re young why- I agree. Why have any bonds? Part of the reason why people have bonds is because they just can’t- they can’t stay in their seat. In other words, they get too freaked out when things go down. So they put bonds in their portfolios so it’s less volatile so they can sleep at night. And it sounds like Brent is not that kind of person. He can handle it.

Joe: Because we look at bonds as a way to damper the volatility in the entire portfolio.

Al: And typically a lot of our clients are closer to retirement age and they need their assets for cash flow.

Joe: They’re a few years older.

Al: So if you’re 100% stocks and another great recession happens and the market goes down 50% and you’re taking money from it at the same time to cover your bills it doesn’t work out very well.

Joe: So let’s say that Brent’s retired, he’s taking $100,000 from his $4,000,000. No big deal. But then all of a sudden the market drops and he’s 100% equities, that $4,000,000 goes to $2,000,000. And then you’re still pulling out that $100,000, then you can kind of find yourself a little bit freaked out. Because now your distribution rate just doubled.

Al: Exactly. So I guess the way I would say it is if you don’t need any money from your liquid investments to live off of, number 1. Number 2, is if you’re on the younger side. Number 3, is you’re okay with the market fluctuations then yeah, skip bonds. I totally agree with that.

Andi: I got a question.

Joe: What do you want now?

Andi: For somebody in Brent’s situation, at what point would you say now it’s time for you to start owning bonds?

Joe: It depends on when his cash flow needs are. What’s the demand and the need for the portfolio?

Al: Let’s say he’s 60 and he needs to pull out whatever- $100,000 from his investments. Then you definitely want some bonds because the stocks are just too volatile. You want to pull from bonds when stocks are down and vice versa. When stocks are up you pull from them.

Active vs. Passive Investments in Retirement vs. Non-Retirement Accounts

Joe: Active versus passive. The 2nd question Brent is asking from Minneapolis. “I’m in Vanguard. I only invest in index funds in my retirement account though it seems like it’s a perfect place for active funds. Vanguard has some amazing funds like Prime Cap which consistently outperforms the S&P. No, not every year, but I think 15 or 20 years it has, and by a considerable amount. Yes, I know past performance doesn’t predict future performance but for that particular fund and a few others it sure seems like they’re amazing bets on a taxable account. Maybe the push against active has gone too far especially if a household-”

Andi: “-if it’s housed in a retirement account-”

Joe: “-if it’s housed-” I’m sorry. I’m sorry. I just rubbed my eye and it went blurry. So here’s the argument with active and passive when it comes to a retirement account versus non-retirement account. If you put an active mutual fund in a non-retirement account it’s not nearly as tax efficient as an ETF or an index fund.

Al: I agree. Because there’s more trades inside the account. So you have more taxation.

Joe: So you’re going to have more turnover in an active account. So you would want to put an active account housed in a retirement account.

Al: If you like active, that’s where you’d put it. I agree with that.

Joe: I know the Prime Cap fund. You look at Vanguard and they’re fairly low cost. If you believe that a portfolio manager can outsmart the overall market and potentially has more information than the market itself, then by all means. I don’t think putting a couple bucks in an active fund that’s fairly low in cost – I mean, go for it. Who cares? It’s not going to make or break with most of your assets- he knows what he’s doing. He’s an astute investor. He makes decent money and he’s saved the bunch. So if he was going to say I’m thinking about buying a BDC and a non-traded REIT and some other commissionable products that were dog- then we would say no. But-

Andi: He’d be emailing another show in San Diego.

Joe: Yeah.

Al: So I would just add one other point maybe. When I was 35, the hot fund which always beat the market was the Magellan. Right? Peter Lynch? I did buy it. And it did not perform ever after, ever again.

Joe: As soon as you bought it.

Andi: You jinxed it.

Al: And part of the reason was it was just too big.

Joe: Too big.

Al: And when a fund gets too big then the fund manager- it’s too hard to buy enough of whatever is the right stock, or what they think is the right stock- it’s like having a cruise ship and trying to turn it- like a turning radius it’s just not going to turn quickly.

Joe: Titanic. Iceberg.

Al: Yeah that too. Yeah.

Al: So anyway I would- I’m not necessarily against the strategy either. I would just caution that sometimes prior active funds that have done well have a hard time maintaining that in going forward.

Joe: But it’s- they’re not amazing bets in a taxable account. They’re an amazing bet in a tax-deferred account.

Al: I agree with that.

Joe: He’s saying taxable so he’s got it backward. Just you want very little transactions in taxable accounts just because you’re going to have short term capital gains; you’re going to have ordinary income; you’re going to have a bunch of stuff sitting on your tax return.

Al: Yes. So just to reiterate- so like an index fund, for example, tends to just have a certain amount of stocks. And they keep them; they don’t buy and sell them. And then so then the fund manager is not buying and selling the stocks inside the portfolio which generally causes a lot of gains.

Joe: But let me- do me a favor, Andi, and pull up Prime Cap. I think that’s actually like a Russell 2000 type fund. But Brent’s also got to be careful that he’s comparing apples and oranges.

Al: Well that’s a good point.

Joe: Because he’s like it’s beaten the S&P 500 over the last 25 years.

Al: Because it’s got small companies.

Joe: Yes. Just give me the assets or in domestic-

Andi: I’m working on it.

Joe:  -more aggressive category large growth. So they’re tilted a little bit more aggressive; probably more value within that. I see it. You’ve just gotta give me a little bit more room there. That’s all.

Andi: I’m trying.

Joe: Expense ratio, 38 bips. That’s minimum investment. It’s closed. We’re looking at investor shares. So it means he’s probably going to have to go somewhere else. But just be careful that you can’t look at here’s this fund versus that fund. It’s beaten the S&P 500. Well it should have, it has more risk. So you have to look at the risk-adjusted return.

Al: Good point.

Joe: In regards to if you’re comparing apples to apples. Especially when you’re looking at actively managed funds, you just want to understand what are they buying. And if they’re taking on more risk it should outperform the S&P 500. Because well you take out the FAANG stocks and everything outperforms the S&P 500. OK. Cool. Thanks a lot for your question, Brent. We’ll try not to talk too much Roth in future shows.

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Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.